Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
2Activity
0 of .
Results for:
No results containing your search query
P. 1
A Post-Keynesian Interpretation of the European Debt Crisis

A Post-Keynesian Interpretation of the European Debt Crisis

Ratings: (0)|Views: 277 |Likes:
Published by mrwonkish
Conventional wisdom suggests that the European debt crisis, which has thus far led to severe adjustment programs crafted by the European Union and the International Monetary Fund in both Greece and Ireland, was caused by fiscal profligacy on the part of peripheral, or noncore, countries in combination with a welfare state model, and that the role of the common currency—the euro—was at best minimal.This paper aims to show that, contrary to conventional wisdom, the crisis in Europe is the result of an imbalance between core and noncore countries that is inherent in the euro economic model. Underpinned by a process of monetary unification and financial deregulation, core eurozone countries pursued export-led growth policies—or, more specifically, “beggar thy neighbor” policies—at the expense of mounting disequilibria and debt accumulation in the periphery. This imbalance became unsustainable, and this unsustainability was a causal factor in the global financial crisis of 2007–08. The paper also maintains that the eurozone could avoid cumulative imbalances by adopting John Maynard Keynes’s notion of the generalized banking principle (a fundamental principle of his clearing union proposal) as a central element of its monetary integration arrangement
Conventional wisdom suggests that the European debt crisis, which has thus far led to severe adjustment programs crafted by the European Union and the International Monetary Fund in both Greece and Ireland, was caused by fiscal profligacy on the part of peripheral, or noncore, countries in combination with a welfare state model, and that the role of the common currency—the euro—was at best minimal.This paper aims to show that, contrary to conventional wisdom, the crisis in Europe is the result of an imbalance between core and noncore countries that is inherent in the euro economic model. Underpinned by a process of monetary unification and financial deregulation, core eurozone countries pursued export-led growth policies—or, more specifically, “beggar thy neighbor” policies—at the expense of mounting disequilibria and debt accumulation in the periphery. This imbalance became unsustainable, and this unsustainability was a causal factor in the global financial crisis of 2007–08. The paper also maintains that the eurozone could avoid cumulative imbalances by adopting John Maynard Keynes’s notion of the generalized banking principle (a fundamental principle of his clearing union proposal) as a central element of its monetary integration arrangement

More info:

Published by: mrwonkish on Jan 14, 2012
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

12/02/2012

pdf

text

original

 
 
Working Paper No. 702
 
The Euro Imbalances and Financial Deregulation:A Post-Keynesian Interpretation of the European Debt Crisis
by
Esteban Pérez-Caldentey
 UN Economic Commission for Latin America and the Caribbean
Matías Vernengo*
 
University of Utah
 
January 2012
* The opinions here expressed are the authors’ own and may not coincide with that of the institutions withwhich they are affiliated. A preliminary version of this paper was presented at Universidad Autónoma deMéxico (UNAM) on September 9, 2011, and at the University of Texas at Austin on November 4, 2011. Wethank, without implicating them, Jörg Bibow, Heiner Flassbeck, James K. Galbraith, Tom Palley, Carlo Panico,Ignacio Perrotini, and other conference participants for their comments on a preliminary version.
The Levy Economics Institute Working Paper Collection presents research in progress byLevy Institute scholars and conference participants. The purpose of the series is todisseminate ideas to and elicit comments from academics and professionals.Levy Economics Institute of Bard College, founded in 1986, is a nonprofit,nonpartisan, independently funded research organization devoted to public service.Through scholarship and economic research it generates viable, effective public policyresponses to important economic problems that profoundly affect the quality of life inthe United States and abroad.
Levy Economics InstituteP.O. Box 5000Annandale-on-Hudson, NY 12504-5000http://www.levyinstitute.orgCopyright © Levy Economics Institute 2012 All rights reserved
 
 
1
ABSTRACT
Conventional wisdom suggests that the European debt crisis, which has thus far led to severeadjustment programs crafted by the European Union and the International Monetary Fund in both Greece and Ireland, was caused by fiscal profligacy on the part of peripheral, or noncore,countries in combination with a welfare state model, and that the role of the commoncurrency—the euro—was at best minimal.
 
This paper aims to show that, contrary toconventional wisdom, the crisis in Europe is the result of an imbalance between core andnoncore countries that is inherent in the euro economic model. Underpinned by a process of monetary unification and financial deregulation, core eurozone countries pursued export-ledgrowth policies—or, more specifically, “beggar thy neighbor” policies—at the expense of mounting disequilibria and debt accumulation in the periphery. This imbalance becameunsustainable, and this unsustainability was a causal factor in the global financial crisis of 2007– 08. The paper also maintains that the eurozone could avoid cumulative imbalances by adoptingJohn Maynard Keynes’s notion of the generalized banking principle (a fundamental principle of his clearing union proposal) as a central element of its monetary integration arrangement.
Keywords:
European Union; Current Account Adjustment; Financial Aspects of EconomicIntegration
JEL Classifications:
F32, F36, O52
 
2
INTRODUCTION
Conventional wisdom suggests that the European debt crisis—which led to severe adjustment programs sponsored by the European Union (EU) and the International Monetary Fund (IMF) inGreece, Ireland, and Portugal—was caused by fiscal profligacy on the part of peripheral or noncore countries and a welfare state model, and that the role of the common currency (theeuro) along with the Maastricht Treaty (1992) was, at best, minimal.
1
In particular, the Germanview, as Charles Wyplosz (2010) aptly named it, is that a solution for the crisis involves theeurozone’s Stability and Growth Pact (SGP). The alternative view, still according to Wyplosz, isthat a reform of EU institutions is needed in order to impose fiscal discipline on the sovereignnational institutions, since a revised SGP would be doomed to fail.Both views, which dominate discussions within the EU, presume that the problem isfiscal in nature. In both cases, the crisis is seen as in traditional neoclassical models—in whichexcessive fiscal spending implies that, at some point, economic agents lose confidence in theability of the State to pay and service its debts, and force adjustment. Excessive spending alsoleads to inflationary pressures, which would be the reason, in this view, for the loss of externalcompetitiveness and not the abandonment of exchange rate policy implicit in a commoncurrency. In other words, the conventional view implies that the balance of payments position isthe result of the fiscal crisis.Finally, the conventional story also relegates financial deregulation to a secondary placein the explanation of the crisis.
2
The idea is that if countries had balanced their budgets andavoided the temptation to create a welfare state, then excessive private spending would not have
1
The euro was initially introduced as an accounting currency on January 1, 1999, replacing the former EuropeanCurrency Unit (ECU) at a ratio of one-to-one. The euro entered circulation on January 1, 2002. Seventeen out of 27member states of the European Union use the euro as a common currency. These are: Belgium, Ireland, France,Luxembourg, Austria, Slovakia, Germany, Greece, Italy, Malta, Portugal, Finland, Estonia, Spain, Cyprus, the Netherlands, and Slovenia. Among these, Austria, Belgium, France, Germany, and the Netherlands are referred toas core countries. Greece, Ireland, Italy, Portugal, and Spain are referred to as nonccore or peripheral countries. Themember countries of the European Union which have not adopted the euro are Bulgaria, the Czech Republic,Denmark, Latvia, Lithuania, Hungary, Poland, Romania, Sweden, and the United Kingdom.
2
See Soros 2010 for a different view. Soros understands the European Crisis as a banking rather than a fiscal crisis.More recently Soros (2011) has argued that the European Crisis is a by-product of the 2008 Crash which forced thefinancial system to “substitute the sovereign credit of governments for the commercial credit that had collapsed”(Soros 2011). From here, it follows that the crisis made
the health of 
the European Banks fall prey to the state of European public finances. Note also that, in spite of the blame placed on lax government finances, there is broadrecognition that European governments have injected significant bailout packages into the financial sector, and thatthis was necessary. As of September 2011, available data for Ireland, Greece, and Spain show that governments’support to the financial sector net of its estimated recovery amounted to 38 percent, 5.4 percent, and 2.1 percent of their respective GDP. See IMF 2011a.

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->